Establishing a foothold in a new market can be a potent weapon against rivals, according to this paper, which finds that the value of footholds far exceeds their small size and the costs of their maintenance. The reason, this paper says, is that footholds deter competitors and make it more difficult for them to predict their rival’s next move.

The authors define a foothold as a tactical or strategic move in which a firm purposefully establishes a small position in a market — by branching out into an untapped geographic area, for example, or introducing a new product. From the foothold, firms can attack (by acquiring a smaller firm, launching a promotional campaign, or simply opening more branches, for instance), withdraw (by stopping the sale of products or services in the market), or maintain a wait-and-see approach.

IKEA’s strategy for international expansion is an example: By opening a single store in each targeted country, IKEA has a foothold for establishing its unique brand in the market before spreading to more locations. Another foothold example could be an “adjacency” — the launch of a related product, say, as in the case of a prepared-meal manufacturer that ventures into snack foods.

To explore the impact of foothold moves on corporate rivalries and competitive behavior, the authors analyzed data on the computer-related manufacturing and software industry in the United States. This industry was chosen because the number of competing firms and rivalry-spurred moves varies considerably across its many segments, and because product life cycles are tracked in months rather than years, allowing the researchers to examine many foothold actions within a limited window of time.

All firms that competed during a three-year period, from 2004 through 2006, within any of the industry’s 139 product markets were initially included in the study. The researchers combined several databases to identify firm characteristics, acquisitions, and evidence of foothold actions — such as price changes or announced intentions to expand market presence.

The researchers did not include small market positions that weren’t intentionally established, and they also eliminated “fighting brands” — new niche products launched by firms in areas where they already had a large overall market share with their existing brand. A market position was considered a foothold when the firm that held that position in a certain product category or geographic area generated quarterly sales from the position that represented less than 3 percent of the total market for that category or area.

Ultimately, the researchers identified 285 foothold moves to study, focusing only on situations in which a firm competed head-to-head with a rival in both the foothold and at least one other market.

After controlling for firm size and profitability, sales trends, and the impact on prices when competitors entered or exited a market, the authors’ regression analysis revealed a paradoxical finding. Although logic would argue that footholds exist to be either exploited for expansion or abandoned when things don’t go well, the biggest category among footholds studied turned out to be those using the wait-and-see approach. In assessing the 285 footholds, the researchers found 85 attacks and 74 withdrawals, but 126 instances of wait-and-see, evidence of what the authors call a maintenance strategy.

Maintaining footholds requires absorbing costs, so why would firms not withdraw from footholds that aren’t being used to launch attacks on their rivals? “The reason might lie in footholds’ inherent value as competitive deterrents,” the authors write.

In highly competitive industries like the computer business, where there is tremendous overlap in products and services sold, companies might be reluctant to attack from a foothold (because they fear retaliation in vital shared markets), but they are also reluctant to withdraw. “As market commonality increases,” the authors note, “firms must be increasingly able to defend their ‘turf’ against competitor aggression.” And in a maintenance strategy, footholds can serve as placeholders to ward off rivals, camouflage moves, and provide options, without forcing a company to make a full-scale investment in new enterprises or capabilities.

Indeed, some firms may establish footholds as “feints,” the authors conclude, with a view toward fooling their competitors into guessing where the next strike will occur. This ambiguity makes it harder for competitors to predict a company’s strategic direction once a foothold has been gained. And the authors note that this problem would be compounded if the company had multiple footholds, because it could then move in a wide variety of unpredictable directions. Multiple footholds also allow firms to retaliate against rivals more swiftly and effectively. “Footholds’ value as competitive weapons may far exceed their size,” the authors write.

The authors advise managers to consider intentionally sequencing a mix of foothold attacks and withdrawals. This would signal both aggression and restraint, murky behavior that could be used to a company’s advantage. For example, a firm that has a foothold could bait its rival by executing a reversible action that leads the rival to try to expand its own foothold. Once the rival has done so, the first firm could back off, potentially leaving its competitor to face an unprofitable market in which it has fruitlessly invested precious resources.

Bottom Line:
Establishing a small position in a new market can give firms the ability to affect the behavior of their rivals and gain a competitive advantage that isn’t always about aggressive expansion. Although costly to maintain, footholds can pay off by discouraging aggression from competitors and by keeping them guessing about a company’s next move.

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